Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, the concept of quantity adjustment
refers to one possible result of supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal...
in a market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
, either due to or in the absence of external constraints on the market. In the textbook story, if the quantity demanded does not equal the quantity supplied in a market, price adjustment
is the rule: if there is a market surplus
or glut (excess supply), prices fall, ending the glut, while a shortage
(excess demand) causes price rises. However, instead of price adjustment -- or, more likely, simultaneously
with price adjustment -- quantities may adjust: a market surplus leads to a cut-back in the quantity supplied, while a shortage causes a cut-back in the quantity demanded. The "short side" of the market dominates, with limited quantity demanded constraining supply in the first case and limited quantity supplied constraining demand in the second.
Economist Alfred Marshall
Alfred Marshall was an Englishman and one of the most influential economists of his time. His book, Principles of Economics , was the dominant economic textbook in England for many years...
saw market adjustment in quantity-adjustment terms in the short run. During a given "market day," the amount on the market was given
-- but it adjusts in the short run, a longer period: if the "supply price" (the price suppliers were willing to accept) was below the "demand price" (what purchasers were willing to pay), the quantity in the market would rise. If the supply price exceeded the demand price, on the other hand, the quantity on the market would fall.
Quantity adjustment contrasts with the tradition of Leon Walras
Marie-Esprit-Léon Walras was a French mathematical economist associated with the creation of the general equilibrium theory.-Life and career:...
and general equilibrium
General equilibrium theory is a branch of theoretical economics. It seeks to explain the behavior of supply, demand and prices in a whole economy with several or many interacting markets, by seeking to prove that a set of prices exists that will result in an overall equilibrium, hence general...
. For Walras, (ideal) markets operated as if
there were an Auctioneer who called out prices and asked for quantities supplied and demanded. Prices were then varied (in a process called tatonnement
or groping) until the market "cleared," with each quantity demanded equal to the corresponding quantity supplied. No actual trading was allowed until the market-clearing price was determined. In Walras' system, only price adjustment operated equate the quantity supplied with the quantity demanded.
A simple model for price adjustment is the Evans price adjustment model
, which proposes the differential equation
which says that the rate of change of price is proportional to the difference in supply and demand. This equation predicts that if demand exceeds supply, price will increase, and vice versa, and also captures the market equilibrium occurring when supply and demand are balanced.